Weighed down: How PI cover is failing advisers

Regulators are facing growing pressure to standardise professional indemnity insurance to stop claims “falling down the cracks” and leaving advisers exposed to a market lacking competition.

The Financial Advice Market Review recommended the FCA carry out a review of the availability of PI cover for smaller advice firms once it has completed its review into the FSCS funding model.

However, there is already disquiet among regulatory bosses with the way the PI market operates for advisers with FSCS chief executive Mark Neale deeming it unfit for purpose.

As advisers face the challenge of obtaining adequate PI cover from a small number of insurers, experts suggest tighter product regulation and standard policy wordings could be a solution to a growing problem.

He said: “Many of the firms that come to us do so because their PI insurance is not fit for purpose. I would be up for understanding how PI insurers make their own judgements about the premium they charge advisers.

“A bigger problem is the lack of fitness for purpose of many PI policies so firms can’t absorb the liabilities that come to them. That tips them into insolvency and they become a charge on us and all of you.”

According to the FCA, PI insurers look at four main areas of a firm’s business when calculating a premium: total income, required limit of indemnity and level of excess, the business’s risk profile, and the nature of business.

Insurance broker Lockton partner Brian Boehmer explains PI cover is written on a claims-made basis with the insurer picking up liability for previous advice provided if a firm has been in operation for a number of years.

Given that there is no legal definition of esoteric, then advisers do not know what is being excluded

He says: “Insurers will look at the work you are doing so the fees will dictate a proportion, then the type of work where fees are generated from. Different areas that an adviser will be involved in will have a different rating depending on an insurer’s claims experience in that area.”

Boehmer adds: “These schemes are designed – not to swindle the taxman – but they operate very close to that line. HMRC is always looking at tightening those loopholes and that adds another risk factor for insurers.”

The regulator has minimum indemnity limits of £873,190 for a single claim and £1,309,785 in total. Firms must have continuous cover from the point of authorisation, cover for Financial Ombudsman Service awards, and they must meet a minimum policy excess. A standard excess across the market is £5,000 for investment advice for each claimant.

Threesixty managing director Phil Young says financial advisers pay a minimum premium of 1.25 per cent of their turnover but, typically, they would pay between 1.5 per cent and 2 per cent.

He adds: “In an easy market it can go down to 1 per cent of turnover and in a very tough market it can be up there at 3 per cent of turnover. You can have something in there that is not too bad in terms of turnover but the excesses can be really big as well.”

Boehmer considers advisers’ premiums are low compared with other professions.

He says: “If you look at other service firms, for instance a legal practice, they could be paying up to 10 per cent of their fee income for PI insurance. Admittedly, their coverage is much broader.”

Exclusions can also create difficulties for advisers. 03 Insurance Solutions managing director Jamie Newell says policy wordings and definitions can leave advisers guessing about what they are covered for.

He says: “Insurers can totally exclude esoteric investments. Given there is no legal definition of esoteric then [advisers] do not know what is being excluded. There is an insurer out there who writes an excess for each and every transaction but there is no definition in the policy wording what a transaction is.”

Advisers have also been victims of the general insurance market cycle with rates hardening and softening over time.

Boehmer and Young say advisers’ PI cover is not a profitable line of business for insurers which has led to companies entering and exiting the marketplace.

Boehmer now estimates there are around 10 insurers underwriting advisers’ PI cover in the UK – a mixture of small Lloyd’s syndicates and larger carriers – however some of those companies will not write 100 per cent of the risk but take a share of the cover.

He puts the number of insurers with active products in the marketplace at six or seven including Liberty Mutual, Collegiate, Amtrust and Antares.

In the past six years, large players including Markel, Beazley, Chubb and QBE have left the market because of increasing claims which left the business line unprofitable.

Young says: “It is not a particularly attractive market for insurers to be in. There needs to be a recognition there is only a finite amount of capacity and appetite for PI insurers to be in there at all.”

He adds: “The PI market goes in cycles where it can be cheap and easy to get and then it starts to stiffen and it is difficult to get hold of PI cover and then exclusions start to appear. In 2002/03 there were a lot of firms out there who could not get any PI cover at all. That would be disastrous at the moment, it would probably drive a lot of advisers out of the market.”

One positive for advisers is that unrated insurers do not have an overwhelming presence in the market. Issues with unrated PI carriers folding plagued solicitors in recent years but Money Marketing could only find evidence of Gibraltar-domiciled Elite Insurance operating in the adviser space, selling its products through broker Hoyl Underwriting.

Boehmer says: “The financial security of an insurer should be a key consideration for anyone buying insurance. Naturally, [unrated insurers] do not have the capital should a claim arise. If they have a sideways exposure to a particular issue that could wipe those insurers out.”

Regulatory disconnect

The industry has engaged regulators in how PI insurance could be improved, but these efforts have not always filled them with confidence.

Young attended a meeting recently where the FCA, the Financial Ombudsman Service and PI insurers were present.

He says: “What came across from the PI insurers was that they do not view themselves as being in a position to underwrite the market for large-scale misselling scandals. They view their role as being there to pick up ad hoc one-off moments of negligence or issues that crop up.

“While the FCA seems to think PI insurers are underwriting based on speculation and rumour the insurers are trying to second-guess what the next big problem will be. There seems to have been a mismatch between what is going on in the PI insurers’ head and what the FCA thinks they are doing.”

While the FCA seems to think PI insurers are underwriting based on speculation and rumour, the insurers are trying to second-guess what the next big problem will be

Boehmer suggests tighter regulation of products before they are launched to market, citing Arch cru as an example of a product that later led to issues for the FSCS.

He says: “That is where the PI market is not fit for purpose, the regulation on these products needs to be tighter, it needs to be classified appropriately at the outset and there would not necessarily be as many losses which would mean coverage could be broader and premiums would be more competitive.

“Perhaps continued monitoring of these products is also required just in case they start off being a low risk and then they move into a different area because of the way they are structured or the economic conditions.”

Introducing standard PI terms and conditions to shut down any “wiggle room” insurers might have in rejecting claims was also suggested.

Newell says: “The FCA does not mandate minimum policy terms and conditions. Solicitors, accountants and surveyors have all got minimum terms and conditions written into their policies. There are no minimum terms for financial advisers so insurers are free to incorporate all different types of exclusions. They need to standardise a policy wording across the board.”

Young says there has already been industry lobbying in this space.

He adds: “From what I have been told anecdotally, some claims have fallen through because the terms are not enforceable which means there is nobody to pick up the bill so it falls on the FSCS levy. The aim of standardising the market would be to protect the FSCS levy by creating a buffer from claims.”

Apfa director general Chris Hannant is also aware of cases where claims will “fall down the cracks” and not be covered by PI insurance.

Hannant explains: “I am aware of a current FOS case where the advice firm is particularly concerned because of issues around notification. The PI insurer is saying it is nothing to do with them and if the PI insurer is not there then instead of being a £5,000 or £10,000 excess it becomes a potentially crippling amount of money.”

Expert View

How to negotiate better PI deals

The Personal Finance Society secured a discount of up to 20 per cent on professional indemnity insurance cover for chartered firms two years ago through PI broker Howden Windsor, where higher levels of professional qualification were recognised and rewarded with lower premium costs and excesses.

Given the increased professionalism and greater transparency under the RDR, coupled with a trend of reducing complaints against advisers, this should, in time, also lead to “less intrusive” regulation and, as a direct result, a reduction in regulatory and PII costs.

Insurers should be recognising that increased qualifications of professionalism should represent lower risk post-RDR and should be reflected in higher levels of cover but respectively lower premiums and excesses.

The PFS has encouraged the FCA to engage with insurers and brokers to ensure it is helping to address areas of uncertainty about regulatory and ombudsman process and the future risk outlook.

Advice firms equally need to be on their guard as all too often price has been the driver at renewal, but the policy wordings vary enormously and well as level of excess amount.

When we engaged Howden, they ensured the cover for chartered firms offered comprehensive coverage at a discounted rate, rather than simply a discounted premium.

The PFS has published a guide to buying PI cover for advisers, which covered areas such as what insurers are looking for, features to be aware of, the importance of notifying insurers of potential claims, and run-off cover.

Advisers fully accept the principle of levies at a fair and sensible level and in addition bear the cost of increasing operational compliance and PII to protect clients, but the current FSCS funding strategy is more unreasonable and unsustainable than exposure of poor PII cover.

We are pleased that a fairer FSCS funding alternative has been the first advice review recommendation out of the blocks.

Keith Richards is chief executive of the Personal Finance Society

Adviser views

Philip J Milton & Company managing director Philip Milton

Standard wordings sound like a good idea but, in reality, the next thing that creates a loss won’t have been covered within the standard policy terms. Insurers look for any opportunity not to pay out. I remember an adage that says the best insurance companies look forward to making payments because that is their endorsement for subsequent business. It is all very well if they try and hide behind the small print but they are the companies that should leave the market because they are not behaving with the utmost good faith.

Aurora Financial Planning chartered financial planner AJ Somal

I am for standardisation of wording but there needs to be more reform of the PI marketplace in terms of the time allocation and the amount of work involved in renewal or arranging new PI insurance. There needs to be innovations in applying online rather than filling out streams of forms.

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19th March 20182:18 pm

Comments

There are 10 comments at the moment, we would love to hear your opinion too.

You pay your PI twice, one premium to my PI insurer and the other to the FSCS (funny enough my PI premium is more or less the 1/2 of my levy) and at the end of the day every-one (clients) gets their money back if they complain, from either source.

There needs to be a dialogue and understanding between firms and insurers , if a claim has been made on a product line and more has been sold the insurer should not assume further claims will follow. Insurers take a narrow view of claims history , claim and be damned seems to be the policy ,as if you do you will be seen as a higher risk , get higher excesses , exclusions or no cover at all because understanding is lacking in most cases . The large scale investment failures will always happen and that is FCS territory but isolated instances are what PI is for , isn’t it ?!

The article is confusing. It’s really quite simple the PI class of business has become no different to the motor class of insurance in regards to claims paid almost automatically. The underwriters have essentially been using pecuniary methods based on Algorithms for too long and this is ‘burning the carriers’ when was the last time and audit and use human factors and compliance risk management to price your risk accordingly?

PI has always been a cess pit. I well recall the differences in quotations – they varied by bas much as 200%. There certainly doesn’t seem to be any rhyme nor reason to the way premiums are assessed. Sure if you have a clean record and don’t deal in mickey mouse products and have a sensible XS it helps.

But as ever Katz’s first law of insurance holds true:

We will charge you the biggest premium we can get away with and fight like hell to negate any claims.

I have slowly come around to DH’s way of thinking in recent years. My PI cost is about 2% of turnover and FCSC is about 2.5% of turnover. So on that basis I still pay less than half what a solicitor would pay – which has cheered me up just a little bit.

Mr Neale says he’d be interested to know how PI insurers make their own judgements about the premium they charge advisers. How ignorant can he be? It’s because of the FSA/FCA’s endless practice of retrospective regulation (hindsight reviews, even though Howard Davies many years ago declared them to be “unhelpful”) and the capricious nature of FOS verdicts (which frequently tend to favour the complainant’s completely undocumented version of his conversations over the comprehensively documented version of the defending adviser).

Look at the pasting that PI insurers took as a result of the Pensions Review. They won’t let that happen again and who can blame them?

Standardised policy wordings won’t work. You can’t dictate the scope of insurers’ policies. If they don’t like what the regulator’s trying to force them to include, they’ll just withdraw from the market. What will that achieve?

Whilst this current ‘claims made’ version of PI insurance exists, most Firms are effectively bust. As many have mentioned here and previously, once 2 or 3 claims in a certain category come in quick succession (ie, the PI year of insurance) the PI insurer effectively ‘excludes’ that category on renewal (I know of a few firms this has happened to)….so upon renewal and any subsequent claim (or claims) that come in again within that category, the firm has to make good any financial loss (which if a claim eventually arrives at FOS is probably 100% guaranteed to be upheld (about the only thing in the FS industry that is guaranteed these days!!).

The problem all revolves around this ‘claims made’ basis…what we all need is protection from PI insurance for any professional negligence on the date the offence supposedly took place, not years later when they’ve had a chance to remove that category.

Let’s face it if the PI insurer on their application form asks for details of the advisory areas you are [and have] working in with clients, and all requests for further information has been provided to them, then after they have calculated a premium based upon that info and assessed risk, they should honour that year’s insurance cover, regardless of when the claim comes in (and lets face it, how realistic is it that a client makes a claim for inappropriate advice in the same PI insurance year the advice is given?…..never!!). Car Insurance, House Insurance, Life Cover all pay out on the day the ‘event’ took place…not years after the event….why can’t PI insurance work the same way? In doing so it really would protect consumers and IFA firms and make the PI insurers do better due diligence when offering terms.

There needs to be a change ASAP (enforced as I don;t see PI insurers doing this willingly) or 1,000s of IFAs will be forced to leave the industry (most of them being genuine and caring IFAs).

hmmm. I’d like to see a standardised PI proposal form, this is 2016 after all. Frankly different product lines carry different risk and that’s all fair and right. What is frustrating is going to a broker (who surveys the market) returns with one premium, then going to another who obtains a different one… and they generate a commission for the sale… so this hardly smacks of independence or lack of bias and I wonder how fit they really are to assess IFA/financial planning firm models…

I have no idea if standard terms would help, being somewhat cynical, I don’t expect PI to payout if it is ever actually needed. Minimum terms sound dreadful, no idea if they really are, but it suggests wriggle room to not pay a claim.

Invariably both regulator and PI sector only focus on sales of products. Never been asked how many debts were cleared, how much tax recouped, how much savings improved, how many families protected from reliance upon the State, how many Wills active, LPAs, people budgeting properly and living within their means trying to be financially independent. People focus on what they measure.